Economic supply of technology, weapons, minerals and other goods

Economic
sanctions are commercial and financial penalties applied by one or more
countries against a targeted country, group, or individual. 1 Economic
sanctions may include various forms of trade barriers, tariffs, and
restrictions on financial transactions. 2

At
the present time, effect of economic sanctions
have more negative and serious
consequences than any time in the past. The main
reason, of changes of effects, patterns, and forms of economic sanctions, is process of liberalization of world economy.
The world is going through a process of globalization. Globalization – the
shift toward a more integrated and interdependent world economy, with more interaction
among companies, states, and different nations. 3 By integration of world
economy, countries had become more integrated and interdependent, and effect of
sanctions can spread between nations who have strong economic relations.

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Firstly,
I think worth to remind that the first sanctions against Russia were
introduced at the March 6, 2014, but they
had a symbolic character and resembled more on unfriendly
gesture from the West than real impact on the economy. The next steps
for the restrictions of the Russian Federation has
become much more significant and make serious damage to the Russian economy in
the medium term. Under the sanctions were government officials, major banks,
energy and defense spheres, in addition to this on the part of European,
American, Japanese, Canadian and Australian companies, it was decided to limit
the supply of technology, weapons, minerals and other goods to the Russian
market.

The
EU’s sanctions policy towards Russia, there we may distinguish three areas:
visa restrictions against a number of citizens, economic – against some state-owned
oil companies, defense and financial sectors, as well as restrictive measures
against the Crimea.

The
sanctions of the US and the European Union are aimed primarily at the key
sector of the Russian economy – to the oil complex. Access to technologies for development of shale and difficultly extracted
oil deposits is blocked. Technological shortage
can be closed by importing equipment from other countries; we can also include
China, but characteristics of Chinese models it is inferior to Western models.

In
the financial and banking sector of the Russian economy, sanctions are aimed to the blocking the source of key financing
liquidity conductors in the banking system, as long-term and cheap money.

Concerning
the population, at the moment the sanctions list against Russian citizens
contains: in the lists of the United States: 68 people; in the EU sanctions
list: 151 people; in the list of Canada: 42 people. 1

Economic
sanctions – have always been considered a phenomenon of mutual restriction, so
Russia also in response to sanctions from the West has introduced restrictive
measures. Traditionally, Russian sanctions were passed through the department
of Consumer Rights Protection and Human Wellbeing (Rospotrebnadzor), which, in
turn, exerted pressure on unwanted countries by prohibiting the supply of
certain goods.

A
rather serious part of Russian countermeasures was the ban on the importation
into Russia of a wide range of food products, mainly produced by the food
industry of the European Union (as well as enterprises of Canada, Australia and the USA). In early August 2015, the Russian
president issued the relevant decree. The list of goods that fell under the
embargo consisted of various food products: meat, dairy products, fish,
vegetables, fruits. In terms of money, the total volume of corresponding
imports at the time of the introduction of countermeasures, as analysts
calculated, was $ 9 billion. In August of the same year, adjustments were made
in the sphere of light industry. The segment of public procurement, in
particular. Under the prohibition was clothing from fabrics, leather and fur. 2

In
2016, considering the trade with non-CIS
countries, the tendency to decline continues. The reason for this was the same
economic sanctions imposed by Western countries, the depreciation of the ruble,
and, undoubtedly, the decline in oil prices, the demand for raw materials in
the world market. High dollar and euro prices influenced Russian foreign trade,
thus cutting the opportunity to rise even by the standards of the last year.

We are in a global economy and, in this regard, present state, is not
integrated into the global economic system, it is impossible. However, the degree
of relationship may be different.
I tried to understand how Russia is dependent on the world, and how, this
relationship reflected to the Russian economy.

Diagram 1. Main trade
partners 3

Into category of dependent sectors of the economy, we can distinguish:

Firstly, it
is the security of the country strategic goods (food, medicine, technology,
components for cars).

In the case of an economic blockade,
under which the country will cease to be introduced strategically important
resources, Russia could face serious problems of a lack of a number of
foodstuffs, medicines and components for
industries. If we imagine a situation of military conflict, which will include
Russia and the West, the Russian pharmaceutical market will have many problems.
Because, at the present time, a European country’s is one of largest trader of
world drug market, and it is accounted for 71.8%, import of Russian
pharmaceutical market is exceed 60%.4 I
mention this impressive numbers, because, dependence in strategically important
resources lead high level of risk to the country.

By looking in many different sources,
I found that Russia is also too dependent on imports of the following products
– boilers, nuclear reactors, machinery and spare parts (more than 30% of
imports – from Europe and the United States).5

Secondly, it
is situation of energy resources. Most oil country sells to the European market
– 67.5%, and the second partner is China, which accounts for 16.85% of the
Russian oil and the third place is occupied by the United States – 6%.

Gas industry in Russia is almost
entirely focused on Europe and the CIS. Transportation of gas to European countries
by pipelines estimated for 64.70%.

Thirdly,
foreign investment is in direct connection with foreign policy, and
relationship between countries.

Fourthly,
sanctions on the banking system and foreign accounts. In financial sector US
has the greatest leverage over Russia: the freezing of accounts of Russian
private investors and public companies.

Thus, examining the degree of
dependence of the Russian economy from the world, I realized that Russia is
quite dependent, and therefore vulnerable.

During the analysis of the effects of
the sanctions, I have estimated the effects of sanctions in this way:

Negative effects

Positive effects

Economic growth slowed to 0.8%, in
the long-term can go negative

On the other hand, the economy is relatively
stable (let’s not forget that the ratio of public debt to GDP in Russia is
11%, while in Western Europe, for example, in France the figure is 95%)

Increasing inflation

the weakening of the ruble

reduction in government revenue
reserves

Lowering Russia’s credit rating to
«BBB» to «BBB-», with the result that the country has become less attractive
for investors, “shortage” of foreign capital inflows amounted to
174 billion USD. Which is equivalent to 8.4% of GDP
the net effect of sanctions taking into account the business activities is
estimated as increased net capital outflow of 124 billion dollars. (6.0% of GDP)

visa restrictions (especially
affect small entrepreneurs)

This situation will allow Russian
companies to turn to the Japanese, Chinese and other banks,
It will help to speed up the diversification of the Russian economy in terms
of breaking away from the West and increasing interest in the East to find a
better balance in its economy and its development prospects

the absence of reduction in the
Russian markets of many goods of foreign origin food group

 

increase range of domestic
production

 

One of the negative consequences can
be attributed to the loss of GDP growth due to sanctions. European businesspersons,
especially those who exported to Russia, are afraid of the negative
consequences of sanctions and hope for their abolition. Their fears are
completely justified. Indeed, according to UN Comtrade data, in 2014, exports
of EU countries to Russia declined by an average of 14% compared to 2013. Of
the 28 members, 25 states were affected by the decline in exports. Especially
strong deterioration in exports could be observed in Malta (-78%), Cyprus
(-42%) and Belgium (-27%).

According to the data published by the
Government of the Russian Federation in the report “On the current
situation in the economy of the Russian Federation in January-February
2016”, the foreign trade turnover decreased by 32.6% compared to January
2015 and amounted to 26.5 billion US dollars, which is explained by the
significant a decrease in the value of both exports and imports.

The European Union still occupies a
special place in the geographical structure of Russia’s foreign trade. However,
its share in trade turnover decreased from 46.2% in January 2015 to 41.7% in
January 2016 ($ 11 billion). Turnover in January 2016 decreased by 39.1%
compared to January 2015, while exports decreased by 43.7%, imports – by 22%.

The advanced EU countries also had
significant export losses: both Germany and the UK experienced a decline of
18%, while in France and Italy; it was about -12%. In 2015, the decline in
exports increased even more. Between 2013 and 2015, in the UK, exports to the
Russian Federation decreased by 51%. In 2015, German exports to Russia
decreased by another 30% compared with 2014.

In the second quarter of 2016, the
Committee of Permanent Representatives of the EU extended economic sanctions
against Russia until January 31, 2017. Russian President Vladimir Putin, in
turn, signed a decree on extending the response restrictive measures by the end
of 2017 6. We must understand that the consequence of such decisions is the
deterioration of the economic situation not in a single country, but throughout
the world. In this regard, it is necessary to analyze the impact of sanctions.

To analyze the consequences, a study
was made of the impact of sanctions on real GDP growth, in both Russia and the
EU. The group of European countries includes 19 Eurozone, which is largely in favor of the cumulative growth of
the European Union and has the same
currency and monetary policy. As already mentioned above, international trade
and financial ties between these countries and Russia were tight until the
conflict escalated. There are two consequences of sanctions: direct – the
decrease in the dynamics of growth of the gross domestic product, indirect –
the reduction in commodity prices due to the restriction of exports and imports.

The following data was used for
analysis. All variables were taken with seasonal variations. Data are quarterly
and are counted until the second quarter of 2016. For the analysis, we used the
data of Rosstat, Eurostat, DataStream and the Bank for International
Settlements on the growth of Russia’s GDP and Eurozone, oil prices, real
effective exchange rates and other economic indicators.

The sanction intensity index was
developed in 2016 by Christian Dreger to illustrate the impact of sanctions.
The value of the index at each point in time is determined by the amount of
sanctions imposed by Western countries and the weights of these sanctions. The
data of this study cover the period from March 2014 to December 2015; in other cases,
the index assumes a zero value (before the introduction of anti-Russian
sanctions). The sanction index for this period ranges from 0 to 9.4.
Unfortunately, the period is very short so that we can make certain forecasts
of the dynamics of economic sanctions in the future, despite the fact that the
data is constantly updated.

                        

                                   Figure
1. The index of intensity of sanctions, %

 

In 2016, economists for the first
time counted Russia’s losses from Western sanctions. According to their
calculations, “the upper limit of damage related to sanctions” was
11%. This term is understood as the difference between the actual GDP growth
from the second quarter of 2014, when sanctions were introduced, for the fourth
quarter of 2015, which was -4.1%, and counterfactual. If there were no
sanctions, GDP growth would have been 6.9% 7. Thus, GDP growth has
significantly decreased for Russia due to the introduction of sanctions. The
same changes can be observed in the dynamics of investments in fixed assets,
the volume of which is rapidly declining year by year.

Fig. 2. A) Dynamics of GDP (in %)
compared to the corresponding quarter of the previous year; B) The economic
indicator of the volume of investment in fixed assets (in %) compared to the
previous year, as can be seen from the graph, the dynamics of GDP growth of the
EU countries is decreasing, but relatively insignificant. In addition, in order
to fully analyze the impact of sanctions on the economy, it is necessary to analyze
the changes in oil price, the fall of which also coincided with the
introduction of sanctions. It is clear that the decline in oil prices has a
negative impact on the economy of Russia. Since a significant part of the
revenues of the state, the treasury is formed due to the export of
hydrocarbons 8.

                                    Fig. 3. Dynamics of oil prices, rubles /
barrel 9

Anti-Russian sanctions by the US and
the EU have had a weak but still positive impact on the Russian economy. For
example, in the study of monthly monitoring, an increase in the intensity index
of industrial production was noted.

                         

Fig. 4. The index of industrial
production, in % to the corresponding period of the previous year

The index of industrial production in
the first half of 2016 as compared to the first half of 2015 was 100.4%, in
June 2016 as compared to June 2015 – 101.7%, compared to May 2016 – 101, 6%.

Influencing Russia through sanctions
to isolate the Russian Federation from the international economy, the economy
of the Eurozone countries has a negative impact on itself.

             

Fig. 5. Nominal effective exchange
rate exchange, in % to the previous year; from 2015 – in% to the previous
quarter

These results can be summarized as
follows. First, sanctions directly affect Russian GDP. The indirect effect of
sanctions is manifested in the regulation of real effective exchange for both
regions. Secondly, much larger differences in GDP growth are observed in Russia
than in Eurozone countries, which is due to the introduction of sanctions. In
contrast, a significant part of the real effective exchange rate fluctuations
is present in Eurozone countries. Thirdly, with the help of the opposite side
analysis, the GDP growth losses were estimated, which averaged slightly less
than 2% compared to the previous quarter for Russia. The corresponding number
for the EU countries is negligible.

Thus, the results of this study prove
the existence of direct and indirect effects of sanctions on the Russian
economy. At the same time, for the euro-zone economy, the impact of
anti-Russian sanctions is insignificant. Given close trade ties between
European countries and Russia, not only direct but also indirect effects play
an important role, since they entail economic shocks due to imposed sanctions.

Over a short period, sanctions have
had a negative impact on political, economic and other areas of activity. There
has been a significant decline in economic growth, investment in fixed assets,
import substitution. However, it is impossible not to note that the sanctions
spurred the Russian Federation to create and develop many areas within the
country. One of the authorities’ tasks now is to provide citizens with favorable
conditions for doing business, as well as the need to improve the tax system,
combat corruption, and develop domestic production. In addition, the positive
effect is because the process of creating a Russian national payment system
within the country has accelerated.

Of course, it is too early to make a final assessment
to the consequences of the introduction of sanctions. The issue of how to solve
the problem of imposing sanctions against Russia is very complex. First,
Russia’s countermeasure is the response
of our country to sanctions. Secondly, it can be noted that one of the main
tasks for the Russian Federation should be to ensure the economic security of
the country. In the current situation of geopolitical tension and the
application of sanctions, as never before, one should pay attention to the
development of the institution of economic security. In addition, for example,
reducing the flow of imports should be an incentive for the development of the
domestic food sector 9. There are also alternative ways to solve the problems
that have arisen – strengthening economic ties with countries that are not
members of the EU, that is, with the eastern countries. This policy is
successfully implemented in the Russian Federation.

Thus, the impact of sanctions on the Russian economy
was not only negative but also stimulated
the development of the economic system and its transition to a radically new level.
According to a number of economists, EU sanctions are an excellent opportunity
to establish a business in the Russian
economy, which, due to its strong focus on oil exports, has not developed as
dynamically as it could. The greatest potential, according to analysts, is
present in the sphere of import substitution. Russia has a sufficient amount of
resources, both in terms of production capacities and raw materials, and in
terms of the scientific component, in order to produce the bulk of the goods
imported from abroad.

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